This document discusses the natural resource curse and how countries can avoid its pitfalls. It begins by outlining five channels through which natural resource abundance can negatively impact economic growth: commodity price volatility, crowding out of the manufacturing sector, development of autocratic institutions, development of anarchic institutions, and procyclical macroeconomic policies. It then provides details on each of these channels, including examples and empirical evidence. The document concludes by stating that while natural resources are not necessarily bad, countries must identify ways to avoid the common pitfalls in order to achieve economic success from their resource wealth. The second half will discuss specific policies and institutions that can help countries do so.
The resource curse refers to the paradox that countries with abundant natural resources tend to have less economic growth and worse development outcomes than countries with fewer natural resources. Empirical evidence shows that growth is slower the higher a country's share of mineral exports. However, some resource-rich countries like Norway, Canada, and Botswana have performed well, indicating natural resources are not inherently a curse. There are several channels through which the resource curse can operate, including price volatility, Dutch disease, procyclical economic behaviors, and inhibited development of strong institutions. Major challenges for resource-rich countries include excessive dependence on exports and rents, undiversified economies, high income inequality, weak governance, corruption, and potential for conflicts. While the resource
The document discusses the resource curse phenomenon where countries with an abundance of natural resources like oil, gas, and minerals tend to have less economic growth and worse development outcomes than countries with fewer natural resources. It provides examples of how the resource curse has severely impacted countries like Venezuela and the Democratic Republic of Congo (DRC). In DRC, the fighting over control of gold and other mineral resources has led to ongoing violence and widespread sexual violence against women and girls with little benefit for the country's people. Strong democratic institutions and transparency in resource industries are discussed as potential ways to overcome the resource curse but major challenges remain.
The document discusses the concept of the "natural resource curse" or "resource trap", where countries with large natural resource wealth tend to have less economic growth than countries with fewer natural resources. Some of the main causes of this are political conflicts over access to resource revenues, volatility of commodity prices, rapid depletion of finite resources, and currency appreciation that damages other industries. To avoid this curse, countries need policies like sovereign wealth funds to invest resource revenues wisely, economic diversification, and good governance around resource extraction.
Hyperinflation occurs when inflation rapidly increases and a currency loses value quickly. The document discusses hyperinflation affecting Zimbabwe and Germany in the 1920s. Causes of hyperinflation include excessive money printing, imbalances between supply and demand, and loss of confidence in an economy. Consequences are decreases in purchasing power, lack of investment, and wealth redistribution. Stopping hyperinflation requires monetary and fiscal reforms like adopting a new currency and balancing government budgets.
The document discusses the resource curse phenomenon where significant natural resource reserves can negatively impact long-term economic growth. It describes how overvalued currency, crowding out of other sectors, and rent-seeking behavior encouraged by resource revenues can retard development. However, countries like Australia and Norway have avoided these issues through strong institutions, fiscal discipline, and sovereign wealth funds. The document also examines how Indonesia has grown its economy despite resource dependence and how its decentralized system distributing resource revenues to regions risks a "regional resource curse" through weaker governance in recipient areas.
- Poverty means lacking basic living standards and conditions like adequate food, shelter, education and healthcare. Over 1 billion people live on less than $1.25 a day.
- In 2015, world leaders agreed to 17 Sustainable Development Goals to improve prosperity and sustainability by 2030 through initiatives targeting issues like poverty, hunger, health, education, water and sanitation.
- Foreign aid involves the transfer of resources like money, food, healthcare and education from wealthier to poorer nations. Australia provides about $4 billion annually in foreign aid, with over 70% going to countries in the Asia-Pacific region focused on issues like health, education, economic development and governance.
The US debt crisis arose from a lack of economic growth following the 2008 financial crisis, leading to widening gaps between government outlays and revenues. By 2011, the debt exceeded $14 trillion and approached the debt ceiling, risking default. To address this, Congress agreed to raise the ceiling while implementing plans to increase taxes and cut over $1 trillion in spending. Currently, the US debt totals over $15 trillion and foreign countries like China and Japan own large portions, with China owning over $1 trillion in treasury bonds.
The Mexican Tequila Crisis of 1994 was triggered by a combination of economic and political factors that undermined confidence in the peso. Rising inflation, a growing current account deficit, and high levels of short-term foreign investment made Mexico's economy vulnerable. Political instability in 1994, including assassinations, further shook confidence. As investors withdrew funds from Mexico that year, the peso was devalued and interest rates rose, causing a recession. The crisis was resolved through IMF and US bailouts totaling $50 billion and Mexico's adoption of austerity measures.
The resource curse refers to the paradox that countries with abundant natural resources tend to have less economic growth and worse development outcomes than countries with fewer natural resources. Empirical evidence shows that growth is slower the higher a country's share of mineral exports. However, some resource-rich countries like Norway, Canada, and Botswana have performed well, indicating natural resources are not inherently a curse. There are several channels through which the resource curse can operate, including price volatility, Dutch disease, procyclical economic behaviors, and inhibited development of strong institutions. Major challenges for resource-rich countries include excessive dependence on exports and rents, undiversified economies, high income inequality, weak governance, corruption, and potential for conflicts. While the resource
The document discusses the resource curse phenomenon where countries with an abundance of natural resources like oil, gas, and minerals tend to have less economic growth and worse development outcomes than countries with fewer natural resources. It provides examples of how the resource curse has severely impacted countries like Venezuela and the Democratic Republic of Congo (DRC). In DRC, the fighting over control of gold and other mineral resources has led to ongoing violence and widespread sexual violence against women and girls with little benefit for the country's people. Strong democratic institutions and transparency in resource industries are discussed as potential ways to overcome the resource curse but major challenges remain.
The document discusses the concept of the "natural resource curse" or "resource trap", where countries with large natural resource wealth tend to have less economic growth than countries with fewer natural resources. Some of the main causes of this are political conflicts over access to resource revenues, volatility of commodity prices, rapid depletion of finite resources, and currency appreciation that damages other industries. To avoid this curse, countries need policies like sovereign wealth funds to invest resource revenues wisely, economic diversification, and good governance around resource extraction.
Hyperinflation occurs when inflation rapidly increases and a currency loses value quickly. The document discusses hyperinflation affecting Zimbabwe and Germany in the 1920s. Causes of hyperinflation include excessive money printing, imbalances between supply and demand, and loss of confidence in an economy. Consequences are decreases in purchasing power, lack of investment, and wealth redistribution. Stopping hyperinflation requires monetary and fiscal reforms like adopting a new currency and balancing government budgets.
The document discusses the resource curse phenomenon where significant natural resource reserves can negatively impact long-term economic growth. It describes how overvalued currency, crowding out of other sectors, and rent-seeking behavior encouraged by resource revenues can retard development. However, countries like Australia and Norway have avoided these issues through strong institutions, fiscal discipline, and sovereign wealth funds. The document also examines how Indonesia has grown its economy despite resource dependence and how its decentralized system distributing resource revenues to regions risks a "regional resource curse" through weaker governance in recipient areas.
- Poverty means lacking basic living standards and conditions like adequate food, shelter, education and healthcare. Over 1 billion people live on less than $1.25 a day.
- In 2015, world leaders agreed to 17 Sustainable Development Goals to improve prosperity and sustainability by 2030 through initiatives targeting issues like poverty, hunger, health, education, water and sanitation.
- Foreign aid involves the transfer of resources like money, food, healthcare and education from wealthier to poorer nations. Australia provides about $4 billion annually in foreign aid, with over 70% going to countries in the Asia-Pacific region focused on issues like health, education, economic development and governance.
The US debt crisis arose from a lack of economic growth following the 2008 financial crisis, leading to widening gaps between government outlays and revenues. By 2011, the debt exceeded $14 trillion and approached the debt ceiling, risking default. To address this, Congress agreed to raise the ceiling while implementing plans to increase taxes and cut over $1 trillion in spending. Currently, the US debt totals over $15 trillion and foreign countries like China and Japan own large portions, with China owning over $1 trillion in treasury bonds.
The Mexican Tequila Crisis of 1994 was triggered by a combination of economic and political factors that undermined confidence in the peso. Rising inflation, a growing current account deficit, and high levels of short-term foreign investment made Mexico's economy vulnerable. Political instability in 1994, including assassinations, further shook confidence. As investors withdrew funds from Mexico that year, the peso was devalued and interest rates rose, causing a recession. The crisis was resolved through IMF and US bailouts totaling $50 billion and Mexico's adoption of austerity measures.
This presentation discusses leading indicators of currency crises. It defines currency crises and reviews different models that attempt to explain them. It then identifies several leading indicators of impending currency crises, including deterioration in the capital account, weakening current account balances, and economic growth slowdowns. The presentation forecasts that Vietnam, Argentina, and Ukraine are countries likely to experience currency crises based on problems like high inflation, overvalued currencies, declining reserves, and slowing economies in each nation.
The Russian financial crisis of 1998 resulted from declining productivity, a fixed exchange rate between the ruble and foreign currencies, and declining oil prices. On August 17, 1998, Russia devalued the ruble, defaulted on domestic debt, and imposed a moratorium on foreign debt repayment. This led to high inflation of 84%, bank closures, reduced agricultural subsidies, and a political crisis for President Yeltsin. Russia recovered through rising oil prices in 1999-2000, devaluation boosting domestic industries, non-monetary exchange, and cash infusions paying back wages and taxes.
Inward FDI flows to developing economies in 2014 reached their highest level at $681 billion with a 2 per cent rise. Developing economies thus extended their lead in global inflows. China became the world’s largest recipient of FDI. Among the top 10 FDI recipients in the world, 5 are developing economies. What are the advantages and disadvantages of foreign direct investment for developing countries?
Causes of the 1997 South East Asian Financial Crises & its Impact on the Fina...Krutika Panari
The 1997 Asian Financial Crisis began in Thailand and spread to other Southeast Asian countries as well as Japan, South Korea and Russia. It was caused by currency speculation and excess foreign debt taken on by countries to finance real estate bubbles and investments. When Thailand floated its currency, it collapsed and investors fled the region, causing currencies and stock markets to crash across Asia. The IMF intervened but its austerity measures exacerbated recessions. The crisis had global impacts including the 1998 Russian crisis and LTCM collapse. It reduced confidence in globalization and international financial institutions.
Global Financial Crisis And Its Impact On The Indian EconomyShradha Diwan
The document discusses the global financial crisis and its impact on the Indian economy. It provides background on how the crisis began in the US due to risky lending practices and how it spread globally. While many countries experienced economic downturns, India was less impacted due to its strong domestic savings and investment rates. The Indian government and central bank implemented stimulus measures to support the economy. Overall, India appeared to be in a better position than other nations to weather the financial crisis.
International aid can come in the form of short-term emergency aid for natural disasters or wars, providing food, clothing, medicine and shelter. Long-term aid helps countries develop over months or years through infrastructure projects like hospitals, schools, power stations and roads. Official aid comes from other countries or groups like the UN using tax money, while voluntary aid comes from charitable donations. Countries provide aid to help poorer countries develop so they can trade more, and to gain political support, while some see it as a moral duty. However, aid is not always effective and can cause problems if unsuitable, does not reach the needy, or creates other issues. Small-scale self-help schemes that involve local people and technology may be
1. The 2008 financial crisis was caused by the bursting of the housing bubble in the U.S., also known as the subprime mortgage crisis.
2. Subprime lending involves giving loans to borrowers who may have difficulty maintaining repayments, and are characterized by higher interest rates and poorer terms.
3. The crisis occurred due to a relaxation in lending regulations, poor creditworthiness of borrowers, rising housing prices, and borrowers' inability to pay their mortgages, leading to failures of major banks and financial institutions.
This document discusses the natural resource curse known as "Dutch disease" where countries with abundant natural resources experience slower economic growth compared to countries with fewer natural resources. It provides examples of how discovery and export of oil and gas led to economic issues in the Netherlands, Nigeria, Russia, Azerbaijan, and other countries. The specific factor model is presented to explain how revenue from the booming natural resource sector can appreciate the currency, draw resources from the manufacturing sector, and harm competitiveness. Ways that countries like Norway have tried to mitigate Dutch disease through sovereign wealth funds and policies to diversify the economy are also examined.
The document provides an overview of the global financial crisis of 2008. It discusses several key points:
- The US housing market boom from 2002-2006 led to a housing price bubble that eventually burst, contributing to the crisis. As housing prices declined sharply from their 2006 peak, foreclosures and defaults increased substantially.
- Loose monetary policy by the US Federal Reserve from 2002-2004, keeping interest rates low, fueled risky lending and the housing bubble. When rates rose in 2005-2006, the default rate on adjustable mortgages skyrocketed.
- Highly leveraged investment banks collapsed in 2008 as default rates rose due to declining lending standards. Stock prices around the world plummeted nearly 40
The document summarizes the evolution of international monetary systems between 1870-1973. It describes the gold standard period, the interwar years, the Bretton Woods system, and issues that arose. The Bretton Woods system established fixed exchange rates but collapsed in the early 1970s due to US inflation and balance of payments problems. The document analyzes policy options countries faced in pursuing internal and external balance under fixed exchange rates.
This document discusses hyperinflation in Zimbabwe from 2000-2007. It notes that inflation rates reached as high as 25,000% during this period. Agricultural production, industrial production, and GDP all declined significantly as the money supply increased over 500 billion percent. This led to high unemployment and economic hardship. The government instituted several currency redenominations and price controls to try and curb inflation but these policies exacerbated shortages and economic problems. Currently Zimbabwe uses foreign currencies like the US dollar and South African rand in place of its own currency, which became essentially worthless due to hyperinflation.
Developing nations face challenges in international trade including dependence on exports of primary goods, unstable export markets, and worsening terms of trade. They have attempted remedies like commodity agreements to stabilize prices, but these have had limited success. Developing nations have pursued both import substitution strategies, protecting domestic industries behind trade barriers, and export-led growth, focusing on manufactured exports. While both have benefits, import substitution risks inefficiency while export-led growth depends on demand in foreign markets. Case studies show mixed results for different countries' trade strategies.
The document discusses the causes and impact of the Great Depression. It began in 1929 with the stock market crash in the US and spread worldwide. Key causes included inequality, high tariffs, monetary policy failures, and overproduction. Farmers and workers were greatly impacted as incomes fell sharply. The depression lasted until the early 1940s and was the longest and deepest economic downturn of the 20th century.
An overview of the 1994 Mexican Peso Crisis (also known as the Tequila Crisis). The presentation explores the background behind the crisis, the causes of the crisis, the impacts on the different stakeholders and the assistance Mexico attained from its neighbouring countries and international institutions.
increasing exchange rate in Bangladesh: Causes and impact in BD economy.arifcu
The document discusses the increasing exchange rate of the Bangladeshi Taka against other major world currencies such as the US Dollar, Euro, and British Pound. It provides data on Bangladesh's foreign exchange reserves, trade deficit, foreign direct investment, and foreign aid from 2010-2012. An increasing exchange rate is caused by reducing foreign reserves, a growing trade deficit, and decreasing foreign investment. A high exchange rate impacts Bangladesh through higher inflation, increased production costs, reduced competitiveness, and a lower standard of living. The document recommends ways to stabilize the exchange rate such as discouraging imports, attracting more foreign investment, stopping money laundering, and minimizing the trade deficit.
The document summarizes the Asian financial crisis that began in July 1997. It provides an overview of the timeline of events, including countries that faced economic troubles and sought assistance from the IMF. It then discusses some of the key causes of the crisis, such as poor economic regulation, overinflated asset prices, and fixed exchange rates. The document also examines the impact and history of the crisis, as well as theories around what fueled the bubble economy. It concludes with recommendations for preventing future financial crises, such as improving global coordination and regulation.
This document provides information on different types of financial flows to developing countries, including foreign aid, remittances, foreign direct investment, and loans. It discusses the scale of these flows, noting that in 2010 private flows such as FDI made up 89.1% of total official and private flows, compared to 10.9% for official development aid. The document also outlines different types of foreign aid and perspectives on the impact and effectiveness of aid, including debates around whether aid fosters long-term growth and self-sufficiency or dependence.
The document discusses the Eurozone debt crisis, providing background on the origins of the euro currency and how debt levels grew unsustainably in Greece, Portugal, Italy and Spain (PIIGS countries). It explains that lack of fiscal controls allowed these countries to overspend for years. The crisis emerged in late 2000s when debt became unsustainable and these countries could no longer borrow from markets. They required bailouts from the EU, IMF and ECB to pay debts and stabilize banks. Root causes included bloated public sectors and uncompetitive economies that struggled with austerity reforms tied to bailout loans.
Foreign aid can take various forms, including bilateral aid between governments, multilateral aid from organizations like the World Bank, and tied aid which must be spent in the donor country. The main purposes of foreign aid are economic development and welfare of recipient countries. While foreign aid aims to help developing nations, critics argue it does not always promote faster growth and can increase inflation or allow interference by donor nations. Supporters counter that foreign aid improves human welfare, builds international relationships, and promotes global stability.
Climate change poses challenges for extractive industries as fossil fuels are phased out. This could lead to stranded assets for oil and coal companies. Countries dependent on extractives may see reduced demand and prices for their exports. Climate action may also boost demand for metals needed for renewable energy and infrastructure. While extractives can boost growth, many countries have experienced a "resource curse" where wealth does not translate to broad development. This can occur through Dutch Disease, reduced economic diversification, procyclical fiscal policy, and weak governance that enables corruption. Managing resource wealth effectively requires strong institutions.
Raimundo Soto: Catholic University of Chile
ERF 24th Annual Conference
The New Normal in the Global Economy: Challenges & Prospects for MENA
July 8-10, 2018
Cairo, Egypt
This presentation discusses leading indicators of currency crises. It defines currency crises and reviews different models that attempt to explain them. It then identifies several leading indicators of impending currency crises, including deterioration in the capital account, weakening current account balances, and economic growth slowdowns. The presentation forecasts that Vietnam, Argentina, and Ukraine are countries likely to experience currency crises based on problems like high inflation, overvalued currencies, declining reserves, and slowing economies in each nation.
The Russian financial crisis of 1998 resulted from declining productivity, a fixed exchange rate between the ruble and foreign currencies, and declining oil prices. On August 17, 1998, Russia devalued the ruble, defaulted on domestic debt, and imposed a moratorium on foreign debt repayment. This led to high inflation of 84%, bank closures, reduced agricultural subsidies, and a political crisis for President Yeltsin. Russia recovered through rising oil prices in 1999-2000, devaluation boosting domestic industries, non-monetary exchange, and cash infusions paying back wages and taxes.
Inward FDI flows to developing economies in 2014 reached their highest level at $681 billion with a 2 per cent rise. Developing economies thus extended their lead in global inflows. China became the world’s largest recipient of FDI. Among the top 10 FDI recipients in the world, 5 are developing economies. What are the advantages and disadvantages of foreign direct investment for developing countries?
Causes of the 1997 South East Asian Financial Crises & its Impact on the Fina...Krutika Panari
The 1997 Asian Financial Crisis began in Thailand and spread to other Southeast Asian countries as well as Japan, South Korea and Russia. It was caused by currency speculation and excess foreign debt taken on by countries to finance real estate bubbles and investments. When Thailand floated its currency, it collapsed and investors fled the region, causing currencies and stock markets to crash across Asia. The IMF intervened but its austerity measures exacerbated recessions. The crisis had global impacts including the 1998 Russian crisis and LTCM collapse. It reduced confidence in globalization and international financial institutions.
Global Financial Crisis And Its Impact On The Indian EconomyShradha Diwan
The document discusses the global financial crisis and its impact on the Indian economy. It provides background on how the crisis began in the US due to risky lending practices and how it spread globally. While many countries experienced economic downturns, India was less impacted due to its strong domestic savings and investment rates. The Indian government and central bank implemented stimulus measures to support the economy. Overall, India appeared to be in a better position than other nations to weather the financial crisis.
International aid can come in the form of short-term emergency aid for natural disasters or wars, providing food, clothing, medicine and shelter. Long-term aid helps countries develop over months or years through infrastructure projects like hospitals, schools, power stations and roads. Official aid comes from other countries or groups like the UN using tax money, while voluntary aid comes from charitable donations. Countries provide aid to help poorer countries develop so they can trade more, and to gain political support, while some see it as a moral duty. However, aid is not always effective and can cause problems if unsuitable, does not reach the needy, or creates other issues. Small-scale self-help schemes that involve local people and technology may be
1. The 2008 financial crisis was caused by the bursting of the housing bubble in the U.S., also known as the subprime mortgage crisis.
2. Subprime lending involves giving loans to borrowers who may have difficulty maintaining repayments, and are characterized by higher interest rates and poorer terms.
3. The crisis occurred due to a relaxation in lending regulations, poor creditworthiness of borrowers, rising housing prices, and borrowers' inability to pay their mortgages, leading to failures of major banks and financial institutions.
This document discusses the natural resource curse known as "Dutch disease" where countries with abundant natural resources experience slower economic growth compared to countries with fewer natural resources. It provides examples of how discovery and export of oil and gas led to economic issues in the Netherlands, Nigeria, Russia, Azerbaijan, and other countries. The specific factor model is presented to explain how revenue from the booming natural resource sector can appreciate the currency, draw resources from the manufacturing sector, and harm competitiveness. Ways that countries like Norway have tried to mitigate Dutch disease through sovereign wealth funds and policies to diversify the economy are also examined.
The document provides an overview of the global financial crisis of 2008. It discusses several key points:
- The US housing market boom from 2002-2006 led to a housing price bubble that eventually burst, contributing to the crisis. As housing prices declined sharply from their 2006 peak, foreclosures and defaults increased substantially.
- Loose monetary policy by the US Federal Reserve from 2002-2004, keeping interest rates low, fueled risky lending and the housing bubble. When rates rose in 2005-2006, the default rate on adjustable mortgages skyrocketed.
- Highly leveraged investment banks collapsed in 2008 as default rates rose due to declining lending standards. Stock prices around the world plummeted nearly 40
The document summarizes the evolution of international monetary systems between 1870-1973. It describes the gold standard period, the interwar years, the Bretton Woods system, and issues that arose. The Bretton Woods system established fixed exchange rates but collapsed in the early 1970s due to US inflation and balance of payments problems. The document analyzes policy options countries faced in pursuing internal and external balance under fixed exchange rates.
This document discusses hyperinflation in Zimbabwe from 2000-2007. It notes that inflation rates reached as high as 25,000% during this period. Agricultural production, industrial production, and GDP all declined significantly as the money supply increased over 500 billion percent. This led to high unemployment and economic hardship. The government instituted several currency redenominations and price controls to try and curb inflation but these policies exacerbated shortages and economic problems. Currently Zimbabwe uses foreign currencies like the US dollar and South African rand in place of its own currency, which became essentially worthless due to hyperinflation.
Developing nations face challenges in international trade including dependence on exports of primary goods, unstable export markets, and worsening terms of trade. They have attempted remedies like commodity agreements to stabilize prices, but these have had limited success. Developing nations have pursued both import substitution strategies, protecting domestic industries behind trade barriers, and export-led growth, focusing on manufactured exports. While both have benefits, import substitution risks inefficiency while export-led growth depends on demand in foreign markets. Case studies show mixed results for different countries' trade strategies.
The document discusses the causes and impact of the Great Depression. It began in 1929 with the stock market crash in the US and spread worldwide. Key causes included inequality, high tariffs, monetary policy failures, and overproduction. Farmers and workers were greatly impacted as incomes fell sharply. The depression lasted until the early 1940s and was the longest and deepest economic downturn of the 20th century.
An overview of the 1994 Mexican Peso Crisis (also known as the Tequila Crisis). The presentation explores the background behind the crisis, the causes of the crisis, the impacts on the different stakeholders and the assistance Mexico attained from its neighbouring countries and international institutions.
increasing exchange rate in Bangladesh: Causes and impact in BD economy.arifcu
The document discusses the increasing exchange rate of the Bangladeshi Taka against other major world currencies such as the US Dollar, Euro, and British Pound. It provides data on Bangladesh's foreign exchange reserves, trade deficit, foreign direct investment, and foreign aid from 2010-2012. An increasing exchange rate is caused by reducing foreign reserves, a growing trade deficit, and decreasing foreign investment. A high exchange rate impacts Bangladesh through higher inflation, increased production costs, reduced competitiveness, and a lower standard of living. The document recommends ways to stabilize the exchange rate such as discouraging imports, attracting more foreign investment, stopping money laundering, and minimizing the trade deficit.
The document summarizes the Asian financial crisis that began in July 1997. It provides an overview of the timeline of events, including countries that faced economic troubles and sought assistance from the IMF. It then discusses some of the key causes of the crisis, such as poor economic regulation, overinflated asset prices, and fixed exchange rates. The document also examines the impact and history of the crisis, as well as theories around what fueled the bubble economy. It concludes with recommendations for preventing future financial crises, such as improving global coordination and regulation.
This document provides information on different types of financial flows to developing countries, including foreign aid, remittances, foreign direct investment, and loans. It discusses the scale of these flows, noting that in 2010 private flows such as FDI made up 89.1% of total official and private flows, compared to 10.9% for official development aid. The document also outlines different types of foreign aid and perspectives on the impact and effectiveness of aid, including debates around whether aid fosters long-term growth and self-sufficiency or dependence.
The document discusses the Eurozone debt crisis, providing background on the origins of the euro currency and how debt levels grew unsustainably in Greece, Portugal, Italy and Spain (PIIGS countries). It explains that lack of fiscal controls allowed these countries to overspend for years. The crisis emerged in late 2000s when debt became unsustainable and these countries could no longer borrow from markets. They required bailouts from the EU, IMF and ECB to pay debts and stabilize banks. Root causes included bloated public sectors and uncompetitive economies that struggled with austerity reforms tied to bailout loans.
Foreign aid can take various forms, including bilateral aid between governments, multilateral aid from organizations like the World Bank, and tied aid which must be spent in the donor country. The main purposes of foreign aid are economic development and welfare of recipient countries. While foreign aid aims to help developing nations, critics argue it does not always promote faster growth and can increase inflation or allow interference by donor nations. Supporters counter that foreign aid improves human welfare, builds international relationships, and promotes global stability.
Climate change poses challenges for extractive industries as fossil fuels are phased out. This could lead to stranded assets for oil and coal companies. Countries dependent on extractives may see reduced demand and prices for their exports. Climate action may also boost demand for metals needed for renewable energy and infrastructure. While extractives can boost growth, many countries have experienced a "resource curse" where wealth does not translate to broad development. This can occur through Dutch Disease, reduced economic diversification, procyclical fiscal policy, and weak governance that enables corruption. Managing resource wealth effectively requires strong institutions.
Raimundo Soto: Catholic University of Chile
ERF 24th Annual Conference
The New Normal in the Global Economy: Challenges & Prospects for MENA
July 8-10, 2018
Cairo, Egypt
The document summarizes Martin Wolf's lecture on the failures of global finance and capital flows that have led to emerging market crises. Some key points:
1. Financial liberalization in emerging markets led to excessive risk-taking and poor regulation, fueling credit growth and asset bubbles.
2. Macroeconomic imbalances like fiscal deficits and currency pegs exacerbated risks. Currency crises then triggered financial crises as foreign debt overwhelmed many countries and companies.
3. Major crises included the Latin American debt crisis in the 1980s, the Mexican "Tequila" crisis of 1994-95, the Asian Financial crisis of 1997-98, and the Argentine crisis of 2001-02. The Asian crisis
The document summarizes the global financial meltdown of 2008-2009. It identifies 25 problems that contributed to the crisis, including high global debt levels, the housing crisis, and the end of the petrodollar system. It describes the severity of the crisis, such as the collapse of shipping and housing markets. The prognosis section discusses differing predictions around the duration and depth of the crisis, ranging from a quick two month recovery to a decade-long depression. Overall, the document takes an optimistic view, arguing that human innovation will enable a recovery despite doomsday predictions from some economists.
1) China is experiencing a slowdown in economic growth, with official GDP figures likely overstating the weakness and other indicators like imports and electricity production pointing to lower actual growth.
2) This is due to rising wages reducing competitiveness, the end of using increased construction investment to boost growth, and monetary policy losing effectiveness despite attempts to ease further.
3) Longer term, China's potential growth is expected to decline as productivity gains slow and population aging accelerates sharply after 2020 as the one-child policy impacts the labor force.
This document provides an overview of business-government trade relations. It begins by outlining the chapter's learning objectives. It then discusses why governments intervene in international trade, outlining political, economic, and cultural motives. Politically, governments intervene to protect jobs, preserve national security, respond to unfair trade practices, and gain influence. Economically, they intervene to protect infant industries and pursue strategic trade policies. Culturally, governments restrict trade to protect national identity. The document provides examples and discusses drawbacks of various intervention strategies.
This document provides biographical and professional details about Dani Rodrik, a prominent political economist. It notes that Rodrik earned his PhD from Princeton University and has held professorships at Columbia University and Harvard University. Some of Rodrik's publications include books on globalization, industrial policy, and structural adjustment. The document also discusses Rodrik's research on the consequences of policy reforms in developing countries during the 1980s, which involved trade liberalization, privatization, and macroeconomic stabilization.
Mining the Data: Investment dynamics in the Peruvian mining industry 1992- 2010pkconference
The document analyzes investment dynamics in Peru's mining industry from 1992 to 2010. Some key findings include:
1. The mining industry became highly concentrated after market reforms, dominated by large transnational corporations. Between 2001-2003 there were over 246 estimated mining projects.
2. Most investment went to increasing productivity through new equipment and infrastructure for processing plants. However, strategies varied between large firms investing in infrastructure and smaller firms focusing on exploration.
3. Prices of commodities like copper, zinc and gold increased over the period, leading to higher profits and more investment by mining firms according to a pro-cyclical pattern. Expectations of future high prices also drove investment.
Globalisation Paradox and International RelationsArmend Muja
This document discusses the relationship between globalization and nation states. It addresses criticisms of globalization undermining nation states and argues this view is too narrow. While globalization shifts domestic power balances and benefits some regions more than others, evidence shows it has increased trade, GDP and government spending overall rather than reducing state significance. The nation state remains important and has transformed to take on a regulatory role within a complex web of global networks.
The document explores the possibility of lasting low oil prices over the next few years. It first examines factors that could support lower prices, such as slowing demand growth from emerging markets and lower production costs for shale oil in the US. It then analyzes the macroeconomic and sector impacts of sustained lower prices. On the macro level, lower oil prices would redistribute revenues between exporters and importers, increase deflationary pressures, and offer a supply-side boost to some sectors. Regarding sectors, oil and oil services companies would face major challenges from declining revenues and profits, while other sectors like transportation and consumer goods would benefit from lower energy costs. The report aims to identify both winners and losers across countries and industries under a scenario of
The document summarizes the financial crisis of 2008 and its aftermath. It discusses how excess leverage and easy credit led to the crisis. It then describes the massive fiscal and monetary responses by governments to counter the recession. Finally, it outlines a new investment strategy focused on bonds, hedging risks, and adapting to long-term volatility in a more regulated post-crisis economic environment.
The Resource Curse and Oil Revenues in Venezuela And AngolaDvinz Oil & Gas,S.A
Dvinz Oil & Gas,S.A: To many people in Latin America, Hugo Chávez was a revolutionary hero who embraced the poor. rabbing control of Venezuela’s vast oil wealth, using its proceeds to fund social and anti-poverty projects, and expelling the free-market scolds from the I.M.F., the World Bank, and his country’s business establishment. On the other hand, Chávez was a leader dealing with the “resource curse” that has afflicted all too many developing countries.
The document discusses the globalization of finance and its risks and challenges. It notes that while financial globalization has benefits like increased capital flows and more efficient allocation of resources, it also contributed to the global financial crisis. Countries with less integrated financial systems were less affected by the crisis. The document argues that truly global financial regulation would be difficult given that fiscal policy authority lies with independent governments, not global bodies, and coordinated regulation could impose the wrong models globally. Overall, the document provides an overview of financial globalization and examines its pros and cons based on the recent financial crisis experience.
Lecture slides in International Economics from a course at the University of the West of England, Bristol. Discusses recent and ongoing transformations of the world economy, including Ohmae's concept of the "Invisible Continent". Download available on the TRUE wiki for International Economics: http://economicsnetwork.ac.uk/international/lecturenotes
This document provides information for a group presentation on international business. It discusses the objectives of the presentation and tutorial program. It provides topics for the group presentation on regional economic integration and the implications of a single currency in the EU. It defines key terms in foreign exchange and the implications of exchange rate movements for managers of international businesses. It includes sample questions that could be addressed and links to relevant videos.
1) The document outlines several potential deleterious effects of newfound oil and gas wealth for a small island nation, including the resource curse, price volatility, authoritarian regimes, rent-seeking behaviors, and Dutch Disease which can weaken other economic sectors.
2) It also notes that oil-producing nations have experienced higher rates of conflict and instability since 1990. Abundant oil wealth can make rebel groups more financially attractive and weaken state institutions.
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1. The Natural Resource Curse
and How to Avoid It
ESE 902
Part I: Channels of the commodity curse
Part II: Policies & institutions to avoid the pitfalls
2. 2
The Natural Resource Curse
Part I: Channels
Some seminal references:
Auty (1990, 2001, 2007)
Sachs & Warner (1995, 2001),
By now there is a large body of research,
which I have surveyed (2011, 2012a, b).
3. Many countries that are
richly endowed with oil,
minerals, or fertile land
have failed to grow more
rapidly than those without.
Example:
Some studies find a negative effect of oil
in particular, on economic performance:
including Kaldor, Karl & Said (2007); Ross (2001);
Sala-i-Martin & Subramanian (2003); and Smith (2004).
Some oil producers in Africa & the Middle East
have relatively little to show for their resources.
4. Meanwhile, East Asian economies
achieved western-level standards of living
despite having virtually no exportable
natural resources:
Japan, Singapore, Hong Kong, Korea & Taiwan,
rocky islands or peninsulas;
followed by China.
6. 6
Are natural resources necessarily bad?
Commodity wealth need not necessarily lead
to inferior economic or political development.
Rather, it is a double-edged sword,
with both benefits and dangers.
It can be used for ill as easily as for good.
The priority should be on identifying ways
to sidestep the pitfalls that have afflicted
commodity producers in the past,
to find the path of success.
No, of course not.
7. 7
Some developing countries have avoided
the pitfalls of commodity wealth.
E.g., Chile (copper)
Botswana (diamonds)
Some of their innovations are worth emulating.
The 2nd half of the lecture will offer some policies
& institutional innovations to avoid the curse:
especially ways of managing price volatility.
Some lessons apply to commodity importers too.
Including lessons of policies to avoid.
8. 8
But, 1st: How could abundance
of commodity wealth be a curse?
What is the mechanism
for this counter-intuitive relationship?
At least 5 categories of explanations.
9. 9
1. Volatility
2. Crowding-out of manufacturing
3. Autocratic Institutions
4. Anarchic Institutions
5. Procyclicality including
1. Procyclical capital flows
2. Procyclical monetary policy
3. Procyclical fiscal policy.
5 Possible Natural Resource Curse Channels
12. 12
Effects of Volatility
Volatility per se can be bad for economic growth.
Hausmann & Rigobon (2003), Blattman, Hwang, & Williamson (2007),
and Poelhekke & van der Ploeg (2007).
Risk inhibits private investment.
Cyclical shifts of labor, land & capital back &
forth across sectors may incur needless costs.
=> role for government intervention?
On the one hand, the private sector dislikes risk as
much as government does & takes steps to mitigate it.
On the other hand the government
cannot entirely ignore the issue of volatility;
e.g., exchange rate policy.
13. 2. Natural resources may
crowd out manufacturing,
and manufacturing could be the sector
that experiences learning-by-doing
or dynamic productivity gains from spillover.
Matsuyama (1992), van Wijnbergen (1984) and Sachs & Warner (1995).
So commodities could in theory be a dead-end sector.
My own view: a country need not repress the
commodity sector to develop the manufacturing sector.
It can foster growth in both .
E.g. Canada, Australia, Norway… Now Malaysia, Chile, Brazil…
14. 3. Econometric findings that oil
and other “point-source resources”
lead to poor institutions
Isham, Woolcock, Pritchett, & Busby (2005)
Sala-I-Martin & Subramanian (2003)
Bulte, Damania & Deacon (2005)
Mehlum, Moene & Torvik (2006)
Arezki & Brückner (2009).
The theory is thought to fit Mideastern oil exporters well.
15. What are the common effects of poor
institutions?
A typical list:
inequality,
corruption,
rent-seeking,
intermittent dictatorship,
ineffective judiciary branch, and
lack of constraints to prevent elites &
politicians from plundering the country.
16. An example, from economic historians
Engerman & Sokoloff (1997, 2000, 2002)
Why did industrialization take place in North,
not the South?
Lands endowed with extractive industries & plantation crops
developed slavery, inequality, dictatorship, and state control,
whereas those climates suited to fishing & small farms
developed institutions of individualism, democracy,
egalitarianism, and capitalism.
When the Industrial Revolution came, the latter areas
were well-suited to make the most of it.
Those that had specialized in extractive industries were not,
because society had come to depend on class structure & authoritarianism,
rather than on individual incentive and decentralized decision-making.
17. 17
4. Anarchic institutions
1. Unsustainably rapid
depletion of resources
2. Unenforceable
property rights
3. Civil war
See Appendix 2 for
elaboration on each.
18. 18
(5) Procyclicality
The Dutch Disease describes unwanted
side-effects of a commodity boom.
Developing countries are
historically prone to procyclicality,
especially commodity producers.
Procyclicality in:
Capital inflows; Monetary policy;
Real exchange rate; Non-traded Goods
Fiscal Policy
19. 19
The Dutch Disease:
5 side-effects of a commodity boom
1) A real appreciation in the currency
2) A rise in government spending
3) A rise in nontraded goods prices
4) A resultant shift of production
out of manufactured goods
5) Sometimes a current account deficit
20. 20
The Dutch Disease: The 5 effects elaborated
1) Real appreciation in the currency
taking the form of nominal currency appreciation
if the exchange rate floats
or the form of money inflows, credit
& inflation if the exchange rate is fixed;
2) A rise in government spending
in response to availability of tax receipts or royalties.
21. 21
The Dutch Disease: 5 side-effects of a commodity boom
3) An increase in non-traded goods
prices
relative to internationally traded goods
4) A resultant shift out of
non-commodity traded goods,
esp. manufactures,
pulled by the more
attractive returns
in the export commodity
and in non-traded goods.
22. 22
The Dutch Disease: 5 side-effects of a commodity boom
5) A current account deficit,
as booming countries attract capital flows,
thereby incurring international debt that
is hard to service when the boom ends.
Manzano & Rigobon (2008): the negative effect of resources on growth
rates during 1970-1990 was mediated through international debt incurred
when commodity prices were high.
Arezki & Brückner (2010a, b): commodity price booms lead to higher
government spending, external debt & default risk in autocracies,
but do not have those effects in democracies.
23. Procyclical capital flows
According to intertemporal optimization theory,
capital flows should be countercyclical:
net capital inflows when exports are doing badly
and net capital outflows when exports do well.
In practice, it does not always work this way.
Capital flows are more procyclical than countercyclical.
Gavin, Hausmann, Perotti & Talvi (1996); Kaminsky, Reinhart & Vegh
(2005); Reinhart & Reinhart (2009); and Mendoza& Terrones (2008).
Invalidates much of existing theory,
though certainly not all.
Theories to explain this involve
capital market imperfections,
e.g., asymmetric information or the need for collateral.
24. Procyclical monetary policy
If the exchange rate is fixed,
surpluses during commodity booms
lead to rising reserves and money supply.
possibly delayed by sterilization attempts.
Example: Gulf States during recent oil booms.
Floating can help, accommodating trade shock.
25. Procyclical real exchange rate
Countries undergoing a commodity boom
experience real appreciation of their currency
taking the form of nominal currency appreciation
for floating-rate commodity exporters,
Colombia, Kazakhstan, Russia, S.Africa, Chile, Brazil….
or the form of money inflows & inflation
for fixed-rate commodity exporters,
Saudi Arabia & UAE….
.
26. Procyclical fiscal policy
Fiscal policy has historically tended
to be procyclical in developing countries
especially among commodity exporters:
Cuddington (1989), Tornell & Lane (1999), Kaminsky, Reinhart &
Vegh (2004), Talvi & Végh (2005), Alesina, Campante & Tabellini
(2008), Mendoza & Oviedo (2006), Ilzetski & Vegh (2008), Medas
& Zakharova (2009), Gavin & Perotti (1997).
Correlation of income & spending mostly positive –
particularly in comparison with industrialized countries.
27. 27
The procyclicality of fiscal policy
A reason for procyclical public spending:
receipts from taxes & royalties rise in booms.
The government cannot resist the temptation
to increase spending proportionately, or more.
Then it is forced to contract in recessions,
thereby exacerbating the swings.
28. 28
Two budget items account for much
of the spending from oil booms:
(i) Investment projects.
Investment in practice may be
“white elephant” projects,
which are stranded without funds
for completion or maintenance
when the oil price goes back down.
Gelb (1986).
(ii) The government wage bill.
Oil windfalls are often spent on public sector wages.
Medas & Zakharova (2009)
Arezki & Ismail (2010):
government spending rises in booms, but is downward-sticky.
Rumbi Sithole took this photo
in “Bayelsa State
in the Niger Delta,in Nigeria.
The state government
received a windfall of money
and didn't have the capacity
to have it all absorbed in
social services so they decided
to build a Hilton Hotel.
The construction company
did a shoddy job, so the tower
is leaning to its right and
it’s unsalvageable..”
29. Correlations between Gov.t Spending & GDP
1960-1999
procyclical
G always used to be pro-cyclical
for most developing countries.
countercyclical
Adapted from Kaminsky, Reinhart & Vegh (2004)
30. 30
An important development --
some developing countries, including
commodity producers, were able to break
the historic pattern in the most recent decade:
taking advantage of the boom of 2002-2008
to run budget surpluses & build reserves,
thereby earning the ability to expand
fiscally in the 2008-09 crisis.
Chile is the outstanding model.
Also Botswana, China, Indonesia, Korea…
The procyclicality of fiscal policy, cont.
31. Correlations between Government spending & GDP
2000-2009
In the last decade,
about 1/3 developing countries
switched to countercyclical fiscal policy:
Negative correlation of G & GDP.
Frankel, Vegh & Vuletin (2012)
procyclical
countercyclical
32. Summary of Part I
Five broad categories of hypothesized channels
whereby natural resources can lead to poor economic
performance:
commodity price volatility,
crowding out of manufacturing,
autocratic institutions,
anarchic institutions, and
procyclical macroeconomic policy, including
capital flows,
monetary policy and
fiscal policy.
But the important question is how to avoid the pitfalls,
to achieve resource blessing instead of resource curse.
34. Appendix 1: I exclude a 6th channel,
The Prebisch-Singer (1950) Hypothesis
that commodities supposedly suffer
a long-run downward relative price trend.
Theoretical reasoning: world demand for primary
products is inelastic with respect to income.
Vs. persuasive theoretical arguments
that we should expect commodity prices
to show upward trends in the long run
Malthus (esp. for food)
Hotelling (for depletable resources).
35. The up trend idea goes back to Malthus (1798)
and early fears of environmental scarcity:
Demand grows with population (geometrically),
Supply does not.
What could be clearer in economics
than the prediction that price will rise?
36. Hotelling (1931)
Firms choose how fast to extract oil or minerals
King Abdullah of Saudi Arabia, with interest rates ≈ 0 in
2008,
apparently believed that the rate of return on oil reserves
was higher if he didn't pump than if he did:
"Let them remain in the ground for
our children and grandchildren..."
Arbitrage =>
expected rate of price increase = interest rate.
37. The empirical evidence
With strong theoretical arguments on both sides,
either for an upward trend or for a downward
trend, it is an empirical question.
Terms of trade for commodity producers had
a slight up trend from 1870 to World War I,
a down trend in the inter-war period,
up in the 1970s,
down in the 1980s and 1990s,
and up in the first decade of the 21st century.
38. What is the overall statistical trend
in commodity prices in the long run?
Some authors find a slight upward trend,
some a slight downward trend. [1]
The answer depends on the date
of the end of the sample.
[1] Cuddington (1992), Cuddington, Ludema & Jayasuriya (2007), Cuddington
& Urzua (1989), Grilli & Yang (1988), Pindyck (1999), Reinhart & Wickham
(1994), Hadass & Williamson (2003), Kellard & Wohar (2005), Balagtas &
Holt (2009), Cuddington & Jerrett (2008), and Harvey, Kellard, Madsen &
Wohar (2010).
39. 39
4.1 Unsustainably
rapid depletion
When exhaustible resources
are in fact exhausted,
the country may be left with nothing.
Three concerns:
Protection of environmental quality.
A motivation for a strategy of economic diversification.
The need to save for the day of depletion
Invest rents from exhaustible resources in other assets.
Hartwick (1977) and Solow (1986).
Appendix 2: Elaboration on Anarchy:
insufficient protection of property rights
41. 41
4.2 Unenforceable property rights
Depletion would be much less of a problem
if full property rights could be enforced,
thereby giving the owners incentive
to conserve the resource in question.
But often this is not possible
especially under frontier conditions.
Overfishing, overgrazing, & over-logging are classic
examples of the “tragedy of the commons.”
Individual fisherman, ranchers, loggers, or miners,
have no incentive to restrain themselves, while the
fisheries, pastureland or forests are collectively depleted.
42. Madre de Dios region of the Amazon rainforest in Peru,
the left-hand side stripped by illegal gold mining.
http://indiancountrytodaymedianetwork.com/2011/02/27/amazon-gold-rush-laying-waste-to-peruvian-rainforest%E2%80%99s-madre-de-dios-20021
43. 43
4.3 War
Where a valuable resource such as oil or diamonds
is there for the taking, factions will likely fight over it.
Oil & minerals are correlated with civil war.
Fearon & Laitin (2003), Collier & Hoeffler (2004),
Humphreys (2005) and Collier (2007).
Chronic conflict in places
such as Sudan comes to mind.
Civil war is, in turn, very bad
for economic development.
44. Appendix 3:
The NRC Skeptics
Which comes first, oil or institutions?
Some question the assumption that oil discoveries
are exogenous and institutions endogenous.
Oil wealth is not necessarily the cause
and institutions the effect,
rather than the other way around.
Norman (2009): the discovery & development of oil
is not purely exogenous, but rather is endogenous
with respect to the efficiency of the economy.
45. in which case it is put to use for the national welfare,
instead of the welfare of an elite.
Mehlum, Moene & Torvik (2006),
Robinson, Torvik & Verdier (2006),
McSherry (2006),
Smith (2007) and
Collier & Goderis (2007).
The important determinant is whether
the country already has good institutions
at the time that oil is discovered,
46. Skeptics argue that commodity exports
are endogenous.
On the one hand, basic trade theory says:
A country may show a high mineral share in exports,
not necessarily because it has a higher endowment of
minerals than others (absolute advantage)
but because it does not have the ability to export
manufactures (comparative advantage).
This could explain negative statistical correlations
between mineral exports and economic development,
invalidating the common inference that minerals are bad for growth.
Maloney (2002) and Wright & Czelusta (2003, 04, 06).
47. Commodity exports are endogenous, continued.
On the other hand, skeptics also have plenty
of examples where successful institutions and
industrialization went hand in hand with rapid
development of mineral resources.
Countries that were able to develop efficiently
their resource endowments as part of
strong economy-wide growth include:
the USA during its pre-war industrialization period
David & Wright (1997).
Venezuela from the 1920s to the 1970s,
Australia since the 1960s, Norway since 1969 oil discoveries,
Chile since adoption of a new mining code in 1983,
Peru since a privatization program in 1992, and
Brazil since lifting restrictions on foreign mining participation in 1995.
Wright & Czelusta (2003, pp. 4-7, 12-13, 18-22).
48. Commodity exports are endogenous, continued.
Examples of countries that were equally well-
endowed geologically but that failed to develop their
natural resources efficiently include:
Chile & Australia before World War I,
and Venezuela since the 1980s.
Hausmann (2003, p.246): “Venezuela’s growth collapse took
place after 60 years of expansion, fueled by oil. If oil explains
slow growth, what explains the previous fast growth?”
49. Part II
Some that are not recommended:
Institutions that try to suppress price volatility.
Recommended:
Devices to hedge risk.
Ideas to reduce macroeconomic procyclicality.
Institutions for better governance.
Policies & institutions to avoid
pitfalls of the Natural Resource Curse
50. 50
The Natural Resource Curse should not
be interpreted as a rule that commodity-
rich countries are doomed to fail.
The question is what policies to adopt
to avoid the pitfalls and improve the chances of prosperity.
A wide variety of measures have been tried
by commodity-exporters cope with volatility.
Some work better than others.
51. Many of the policies that have been
intended to suppress commodity
volatility do not work out so well
Producer subsidies
Stockpiles
Marketing boards
Price controls
Export controls
Blaming derivatives
Resource nationalism
Nationalization
Banning foreign
participation
52. Devices to share risks
1. Index contracts with foreign companies
(royalties…) to the world commodity price.
2. Hedge commodity revenues
in options markets
3. Link debt to the commodity price
7 recommendations
for commodity-exporting countries
53. 4. Allow some currency appreciation in response
to a commodity boom, but not a free float.
- Accumulate some forex reserves first.
- Raise banks’ reserve requirements, esp. on $ liabilities.
5. If the monetary anchor is to be Inflation Targeting,
consider using as the target, in place of the CPI,
a price measure that puts weight
on the export commodity (Product PriceTargeting).
6. Emulate Chile: to avoid over-spending in boom times,
allow deviations from a target surplus only
in response to permanent commodity price rises.
7 recommendations for commodity producers continued
Countercyclical macroeconomic policy
PPT
54. 7. Manage commodity funds professionally.
Invest them abroad
like Norway’s Pension Fund,
Reasons:
(1) for diversification,
(2) to avoid cronyism in investments.
but insulated from politics
like Botswana’s Pula Fund.
Professionally managed, to optimize financially.
7 recommendations for commodity producers, concluded
Good governance institutions
55. Elaboration on two proposals to reduce
the procyclicality of macroeconomic policy
for commodity exporters
I) To make monetary policy less
procyclical: Product Price Targeting
II) To make fiscal policy less
procyclical: emulate Chile.
PPT
56. I) The challenge of designing
a currency regime for countries where
terms of trade shocks dominate the cycle
Fixing the exchange rate leads to procyclical
monetary policy: credit expands in commodity booms.
Floating accommodates terms of trade shocks.
But volatility can be excessive;
also floating does not provide a nominal anchor.
Inflation Targeting, in terms of the CPI,
provides a nominal anchor;
but can react perversely to terms of trade shocks.
Needed: an anchor that accommodates trade shocks
57. Product Price Targeting:
Target an index of domestic production prices [1]
such as the GDP deflator
• Include export commodities in the index
and exclude import commodities,
• so money tightens & the currency appreciates
when world prices of export commodities rise
• accommodating the terms of trade --
• not when world prices of import commodities rise.
• The CPI does it backwards:
• It calls for appreciation when import prices rise,
• not when export prices rise !
[1] Frankel (2011, 2012).
PPT
58. Appendix II: Who achieves
counter-cyclical fiscal policy?
Countries with “good institutions”
”On Graduation from Fiscal Procyclicality” 2013,
Frankel with C.Végh & G.Vuletin; J.Dev.Economics.
59. What, specifically, are good institutions?
1st rule – Governments must set a budget target,
set = 0 in 2008 under Pres. Bachelet.
2nd rule – The target is structural:
Deficits allowed only to the extent that
(1) output falls short of trend, in a recession, or
(2) the price of copper is below its trend.
3rd rule – The trends are projected by 2 panels
of independentexperts, outside the political process.
Result: Chile avoids the pattern of 32 other governments,
where forecasts in booms are biased toward over-optimism.
Chile ran surpluses in the 2003-07 boom,
while the U.S. & Europe failed to do so.
The example of Chile since 2000
60. Appendices
on recommendations for
dealing with the natural resource curse
Appendix 4: Policies not recommended
Appendix 5: Elaboration on proposal to make
monetary policy less procyclical – PPT, using
GDP deflator to set annual inflation target.
Appendix 6: Elaboration on proposal to make
fiscal policy less procyclical – emulate Chile,
setting structural targets with independent
fiscal forecasts
61. Appendix 4:
Policies that have been tried
but that are not recommended
Producer subsidies
Stockpiles
Marketing boards
Price controls
Export controls
Blaming derivatives
Resource nationalism
Nationalization
Banning foreign
participation
62. Unsuccessful policies to reduce commodity price volatility:
1) Producer subsidies to “stabilize” prices at high levels,
often via wasteful stockpiles & protectionist import barriers.
Examples:
The EU’s Common Agricultural Policy
Bad for EU budgets, economic efficiency,
international trade & consumer pocketbooks.
Or fossil fuel subsidies
which are equally distortionary & budget-busting,
and disastrous for the environment as well.
Or US corn-based ethanol subsidies,
with tariffs on Brazilian sugar-based ethanol.
63. Unsuccessful policies, continued
2) Price controls to “stabilize” prices at low levels
Discourage investment & production.
Example: African countries adopted
commodity boards for coffee & cocoa
at the time of independence.
The original rationale: to buy the crop in years
of excess supply and sell in years of excess demand.
In practice the price paid to cocoa & coffee farmers
was always below the world price.
As a result, production fell.
64. Microeconomic policies, continued
Often the goal of price controls is to shield
consumers of staple foods & fuel from increases.
But the artificially suppressed price
discourages domestic supply, and
requires rationing to domestic households.
Shortages & long lines can fuel political
rage as well as higher prices can.
Not to mention when the government
is forced by huge gaps to raise prices.
Price controls can also require imports,
to satisfy excess demand.
Then they raise the world price even more.
65. Microeconomic policies, continued
3) In producing countries, prices are artificially
suppressed by means of export controls
to insulate domestic consumers from a price rise.
In 2008, India capped rice exports.
Argentina did the same for wheat exports,
as did Russia in 2010.
India banned cotton exports in March 2012.
Results:
Domestic supply is discouraged.
World prices go even higher.
66. An initiative at the G20
meetings in France
in 2011 deserved
to succeed:
Producers and consuming countries in grain
markets should cooperatively agree to refrain
from export controls and price controls.
The result would be lower world price volatility.
One hopes for steps in this direction,
perhaps working through the WTO.
67. An initiative that has less merit:
4) Attempts to blame speculation for volatility
and so to ban derivatives markets.
Yes, speculative bubbles sometimes hit prices.
But in commodity markets,
prices are more often the signal for fundamentals.
Don’t shoot the messenger.
Also, derivatives are useful for hedgers.
68. An example of commodity speculation
In the 1955 movie version
of East of Eden, the legendary
James Dean plays Cal.
Like Cain in Genesis, he
competes with his brother for
the love of his father.
Cal “goes long” in the market
for beans, in anticipation of
a rise in demand if the US
enters WWI.
69. An example of commodity speculation, cont.
Sure enough, the price of beans goes sky high,
Cal makes a bundle, and offers it to his father,
a moralizing patriarch.
But the father is morally offended by Cal’s speculation,
not wanting to profit
from others’ misfortunes,
and tells him he will have
to “give the money back.”
70. Cal has been the agent of
Adam Smith’s famous invisible hand:
By betting on his hunch about
the future, he has contributed
to upward pressure on the price
of beans in the present,
thereby increasing the supply so that more
is available precisely when needed (by the Army).
The movie even treats us to a scene where Cal
watches the beans grow in a farmer’s field,
something real-life speculators seldom get to see.
An example of commodity speculation, cont.
71. The overall lesson for microeconomic policy
Attempts to prevent
commodity prices from
fluctuating generally fail.
Even though enacted in the name of reducing volatility
& income inequality, their effect is often different.
Better to accept volatility and cope with it.
72. “Resource nationalism”
Another motive for commodity export controls:
5) To subsidize downstream industries.
E.g., “beneficiation” in South African diamonds
But it didn’t make diamond-cutting competitive,
and it hurt mining exports.
6) Nationalization of foreign companies.
Like price controls,
it discourages investment.
73. “Resource nationalism” continued
7) Keeping out foreign companies altogether.
But often they have the needed technical expertise.
Examples: declining oil production in Mexico & Venezuela.
8) Going around “locking up” resource supplies.
China must think that this strategy will
protect it in case of a commodity price shock.
But global commodity markets are increasingly integrated.
If conflict in the Persian Gulf doubles world oil prices,
the effect will be pretty much the same
for those who buy on the spot market and
those who have bilateral arrangements.
74. The overall lesson for
microeconomic policy
Attempts to prevent
commodity prices from
fluctuating generally fail.
Even though enacted
in the name of reducing volatility & income inequality,
their effect is often different.
Better to accept volatility and cope with it.
For the poor: well-designed transfers,
along the lines of Oportunidades or Bolsa Familia.
75. Appendix 5:
Product Price Targeting
Each of the traditional candidates for nominal
anchor has an Achilles heel.
The CPI anchor does not accommodate
terms of trade changes:
IT tightens M & appreciates when import prices rise
not when export prices rise,
which is backwards.
Targeting core CPI does not much help.
76. Professor Jeffrey Frankel
Targeted
variable
Vulnerability Example
Gold standard Price
of gold
Vagaries of world
gold market
1849 boom;
1873-96 bust
Commodity
standard
Price of agric.
& mineral
basket
Shocks in
imported
commodity
Oil shocks of
1973-80, 2000-11
Monetarist rule M1 Velocity shocks US 1982
Nominal income
targeting
Nominal
GDP
Measurement
problems
Less developed
countries
Fixed
exchange rate
$
(or €)
Appreciation of $
(or € )
EM currency crises
1995-2001
Inflation targeting
CPI Terms of trade
shocks
Oil shocks of
1973-80, 2000-11
6 proposed nominal targets and the Achilles heel of each:
Vulnerability
77. Why is PPT better than a fixed exchange rate
for countries with volatile export prices?
Better response to trade shocks (countercyclical):
If the $ price of the export commodity goes up,
the currency automatically appreciates,
moderating the boom.
If the $ price of the export commodity goes down,
the currency automatically depreciates,
moderating the downturn
& improving the balance of payments.
PPT
78. Why is PPT better than CPI-targeting
for countries with volatile terms of trade?
Better response to trade shocks (accommodating):
If the $ price of imported commodity goes up,
CPI target says to tighten monetary policy
enough to appreciate the currency.
Wrong response. (E.g., oil-importers in 2007-08.)
PPT does not have this flaw .
If the $ price of the export commodity goes up,
PPT says to tighten money enough to appreciate.
Right response. (E.g., Gulf currencies in 2007-08.)
CPI targeting does not have this advantage.
PPT
79. Empirical findings
Simulations of 1970-2000
Gold producers:
Burkino Faso, Ghana, Mali, South Africa
Other commodities:
Ethiopia (coffee), Nigeria (oil), S.Africa (platinum)
General finding:
Under Product Price Targets, their currencies
would have depreciated automatically in 1990s
when commodity prices declined,
perhaps avoiding messy balance of payments crises.
Sources: Frankel (2002, 03a, 05), Frankel & Saiki (2003)
80. Price indices
CPI & GDP deflator each include:
an international good
import good in the CPI,
export good in GDP deflator;
And the non-traded good,
with weights f and (1-f), respectively:
cpi = (f)pim +(1-f)pn ,
p = (f)px + (1-f) pn .
81. Estimation for each country of weights in national price index on 3 sectors:
non tradable goods, leading commodity export, & other tradable goods
Non
Tradables
Leading
Comm.
Export
Oil
Other
Tradables
Total
CPI 0.6939 0.0063 0.0431 0.2567 1.000
PPI 0.6939 0.0391 0.0230 0.2440 1.000
CPI 0.5782 0.0163 0.0141 0.3914 1.000
PPI 0.5782 0.1471 0.0235 0.2512 1.000
CPI 0.5235 0.0079 0.0608 0.4078 1.000
PPI 0.5235 0.0100 0.1334 0.3332 1.000
CPI 0.5985 -- 0.0168 0.3847 1.000
PPI 0.5985 -- 0.0407 0.3608 1.000
CPI 0.6413 0.0002 0.0234 0.3351 1.000
PPI 0.6413 0.1212 0.0303 0.2072 1.000
CPI 0.3749 -- 0.0366 0.5885 1.000
PPI 0.3749 -- 0.0247 0.6003 1.000
CPI 0.3929 0.1058 0.0676 0.4338 1.000
PPI 0.3929 0.0880 0.0988 0.4204 1.000
CPI 0.6697 0.0114 0.0393 0.2796 1.000
PPI 0.6697 0.040504 0.021228 0.268568 1.000
CPI 0.6230 0.0518 0.0357 0.2895 1.000
PPI 0.6230 0.2234 0.1158 0.0378 1.000
* Oil is the leading commodity export.
PRY
PER
URY
ARG
BOL
CHL
COL*
JAM
MEX*
Argentina is
relatively closed;
The leading export
commodity usually
has a higher weight
in the country’s PPI
than in its CPI,
as expected.
(Jamaicans don’t
eat bauxite.)
Mexico is
relatively open.
“A Comparison of Product Price
Targeting and Other Monetary
Anchor Options, for Commodity-
Exporters in Latin America,"
Economia, vol.11, 2011
(Brookings), NBER WP 16362.
82. In practice, IT proponents agree central banks
should not tighten to offset oil price shocks
They want focus on core CPI, excluding food & energy.
But
food & energy ≠ all supply shocks.
Use of core CPI sacrifices some credibility:
If core CPI is the explicit goal ex ante, the public feels confused.
If it is an excuse for missing targets ex post, the public feels tricked.
Perhaps for that reason, IT central banks apparently
do respond to oil shocks by tightening/appreciating,
as the following correlations suggests….
83. Table 1: LACA Countries’ Current Regimes and Monthly Correlations of Exchange Rate Changes ($/local currency) with Dollar Import Price Changes
Import price changes are changes in the dollar price of oil.
Exchange Rate Regime Monetary Policy 1970-1999 2000-2008 1970-2008
ARG Managed floating Monetary aggregate target -0.0212 -0.0591 -0.0266
BOL Other conventional fixed peg Against a single currency -0.0139 0.0156 -0.0057
BRA Independently floating Inflation targeting framework (1999) 0.0366 0.0961 0.0551
CHL Independently floating Inflation targeting framework (1990)* -0.0695 0.0524 -0.0484
CRI Crawling pegs Exchange rate anchor 0.0123 -0.0327 0.0076
GTM Managed floating Inflation targeting framework -0.0029 0.2428 0.0149
GUY Other conventional fixed peg Monetary aggregate target -0.0335 0.0119 -0.0274
HND Other conventional fixed peg Against a single currency -0.0203 -0.0734 -0.0176
JAM Managed floating Monetary aggregate target 0.0257 0.2672 0.0417
NIC Crawling pegs Exchange rate anchor -0.0644 0.0324 -0.0412
PER Managed floating Inflation targeting framework (2002) -0.3138 0.1895 -0.2015
PRY Managed floating IMF-supported or other monetary program -0.023 0.3424 0.0543
SLV Dollar Exchange rate anchor 0.1040 0.0530 0.0862
URY Managed floating Monetary aggregate target 0.0438 0.1168 0.0564
Oil Exporters
COL Managed floating Inflation targeting framework (1999) -0.0297 0.0489 0.0046
MEX Independently floating Inflation targeting framework (1995) 0.1070 0.1619 0.1086
TTO Other conventional fixed peg Against a single currency 0.0698 0.2025 0.0698
VEN Other conventional fixed peg Against a single currency -0.0521 0.0064 -0.0382
* Chile declared an inflation target as early as 1990; but it also had an exchange rate target, under an explicit band-basket-crawl regime, until 1999.
LAC Countries’ Current Regimes and Monthly Correlations
of Exchange Rate Changes ($/local currency) with $ Import Price Changes
Table 1
IT
coun-
tries
show
correl-
ations
> 0.
84. The 4 inflation-targeters in Latin America
show correlation (currency value in $ , import prices in $)
> 0 ;
> correlation before they adopted IT;
> correlation shown by non-IT
Latin American oil-importing countries.
85. Why is the correlation between the import
price and the currency value revealing?
The currency of an oil importer should not
respond to an increase in the world oil price
by appreciating, to the extent that these
central banks target core CPI .
When these IT currencies respond by
appreciating instead, it suggests that the
central bank is tightening money to reduce
upward pressure on headline CPI.
86. Appendix 6:
Chilean fiscal policy
In 2000 Chile instituted its structural budget rule.
The institution was formalized in law in 2006.
The structural budget deficit must be zero,
originally BS > 1% of GDP, then cut to ½ %, then 0 --
where structural is defined by output & copper price
equal to their long-run trend values.
I.e., in a boom the government can only spend
increased revenues that are deemed permanent;
any temporary copper bonanzas must be saved.
87. The crucial institutional innovation in Chile
How has Chile avoided over-optimistic official forecasts?
especially the historic pattern of
over-exuberance in commodity booms?
The estimation of the long-term path
for GDP & the copper price
is made by two panels of independent experts,
and thus is insulated from political pressure & wishful thinking.
Other countries might usefully emulate Chile’s innovation
or in other ways delegate to independent agencies
estimation of structural budget deficit paths.
88. Chile’s fiscal position strengthened immediately:
Public saving rose from 2.5 % of GDP in 2000 to 7.9 % in 2005
allowing national saving to rise from 21 % to 24 %.
Government debt fell sharply as a share of GDP
and the sovereign spread gradually declined.
By 2006, Chile achieved a sovereign debt rating of A,
several notches ahead of Latin American peers.
By 2007 it had become a net creditor.
By 2010, Chile’s sovereign rating had climbed to A+,
ahead of some advanced countries.
=> It was able to respond to the 2008-09 recession
via fiscal expansion.
The Pay-off
89. In 2008, with copper prices spiking up,
the government of President Bachelet had been
under intense pressure to spend the revenue.
She & Fin.Min.Velasco held to the rule, saving most of it.
Their popularity ratings fell sharply.
When the recession hit and the copper price came
back down, the government increased spending,
mitigating the downturn.
Bachelet&Velasco’s
popularity reached
historic highs in 2009.
90. Evolution of approval and disapproval
of four Chilean presidents
Presidents Patricio Aylwin, Eduardo Frei, Ricardo Lagos and Michelle Bachelet
Data: CEP, Encuesta Nacional de Opinion Publica, October 2009, www.cepchile.cl. Source: Engel et al (2011).
91. 5 econometric findings regarding bias toward
optimism in official budget forecasts.
Official forecasts in a sample of 33 countries
on average are overly optimistic, for:
(1) budgets &
(2) GDP .
The bias toward optimism is:
(3) stronger the longer the forecast horizon;
(4) greater in booms
(5) greater for euro governments under SGP budget rules;
92. (4) The optimism in official budget forecasts is
stronger at the 3-year horizon, stronger among
countries with budget rules, & stronger in booms.
Frankel, 2012, “A Solution to Fiscal Procyclicality:
The Structural Budget Institutions Pioneered by Chile.”
93. Budget balance forecast error as % of GDP, Full dataset
(1) (2) (3)
One year ahead Two years ahead Three years
ahead
GDP relative
to trend
0.093***
(0.019)
0.258***
(0.040)
0.289***
(0.063)
Constant 0.201 0.649*** 1.364***
(0.197) (0.231) (0.348)
Observations 398 300 179
Variable is lagged so that it lines up with the year in which the forecast was made.
*** p<0.01 Robust standard errors in parentheses, clustered by country.
(4) Official budget forecasts are biased
more if GDP is currently high & especially at longer horizons
33 countries
94. Budget balance forecast error
as a % of GDP, Full Dataset
(1) (2) (3) (4)
One year
ahead
Two years
ahead
One year
ahead
Two years
ahead
SGPdummy 0.658 0.905** 0.407 0.276
(0.398) (0.406) (0.355) (0.438)
SGP dummy *
(GDP - trend)
0.189**
(0.0828)
0.497***
(0.107)
Constant 0.033 0.466* 0.033 0.466*
(0.228) (0.248) (0.229) (0.249)
Observations 399 300 398 300
(5) Official budget forecasts are more optimistically biased
in countries subject to a budget deficit rule (SGP)
*** p<0.01, ** p<0.05, * p<0.1 Robust standard errors in parentheses, clustered by country.
33 countries
95. 5 more econometric findings regarding bias
toward optimism in official budget forecasts.
(6) The key macroeconomic input for budget forecasting in
most countries: GDP. In Chile: the copper price.
(7) Real copper prices revert to trend in the long run.
But this is not always readily perceived:
(8) 30 years of data are not enough
to reject a random walk statistically; 200 years of data are needed.
(9) Uncertainty (option-implied volatility) is higher
when copper prices are toward the top of the cycle.
(10) Chile’s official forecasts are not overly optimistic.
It has apparently avoided the problem of forecasts
that unrealistically extrapolate in boom times.
96. In sum, institutions recommended
to make fiscal policy less procyclical:
Official growth & budget forecasts tend toward wishful thinking:
unrealistic extrapolation of booms 3 years into the future.
The bias is worse among the European countries
supposedly subject to the budget rules of the SGP,
presumably because government forecasters feel pressured
to announce they are on track to meet budget targets even if they are not.
Chile is not subject to the same bias toward over-optimism in
forecasts of the budget, growth, or the all-important copper price.
The key innovation that has allowed Chile
to achieve countercyclical fiscal policy:
not just a structural budget rule in itself,
but rather the regime that entrusts to two panels of experts
estimation of the long-run trends of copper prices & GDP.
97. Application to other countries
Any country could adopt the Chilean mechanism.
Suggestion: give the panels more institutional independence
as is familiar from central banking:
laws protecting them from being fired.
Open questions:
Are the budget rules to be interpreted as ex ante or ex post?
How much of the structural budget calculations are
to be delegated to the independent panels of experts?
Minimalist approach: they compute only 10-year moving averages.
Can one guard against subversion of the institutions (CBO) ?
98.
99. References by the author
Project Syndicate,
“Escaping the Oil Curse,” Dec.9, 2011.
"Barrels, Bushels & Bonds: How Commodity Exporters Can Hedge Volatility," Oct.17, 2011.
“The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions,”
2012, Commodity Price Volatility and Inclusive Growth in Low-Income Countries , R.Arezki & Z.Min, eds..
HKS RWP12-014. High Level Seminar, IMF Annual Meetings, DC, Sept.2011.
"The Curse: Why Natural Resources Are Not Always a Good Thing,”
Milken Institute Review, vol.13, 4th quarter 2011.
“The Natural Resource Curse: A Survey,” 2012, Chapter 2 in Beyond the Resource Curse,
B.Shaffer & T. Ziyadov, eds. (U.Penn. Press); proofs & notes; Summary. CID WP195, 2011.
“How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?”
Natural Resources, Finance & Development, R.Arezki, T.Gylfason & A.Sy, eds. (IMF), 2011. HKS RWP 11-015.
“On Graduation from Procyclicality,” 2012, with C.Végh & G.Vuletin; J. Dev. Economics.
“Chile’s Solution to Fiscal Procyclicality,” 2012, Transitions blog, Foreign Policy.
“A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by
Chile,” in Fiscal Policy and Macroeconomic Performance, 2012. Central Bank of Chile WP 604, 2011.
"Product Price Targeting -- A New Improved Way of Inflation Targeting," in MAS
Monetary Review Vol.XI, issue 1, April 2012 (Monetary Authority of Singapore).
“A Comparison of Product Price Targeting and Other Monetary Anchor Options, for
Commodity-Exporters in Latin America," Economia, vol.11, 2011 (Brookings), NBER WP 16362.